1. Chapter 8 - International Strategy
MGNT428 BUSINESS POLICY & STRATEGY
Dr. Gar Wiggs,
Instructor

2. Knowledge Objectives
Studying this chapter should provide you with the strategic management knowledge needed to:
Explain traditional and emerging motives for firms to pursue international diversification.
Explore the four factors that lead to a basis for international business-level strategies.
Define the three international corporate-level strategies: multidomestic, global, and transnational.
Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization.

3. Knowledge Objectives (cont’d)
Studying this chapter should provide you with the strategic management knowledge needed to:
Name and describe the five alternative modes for entering international markets.
Explain the effects of international diversification on firm returns and innovation.
Name and describe two major risks of international diversification.
Explain why the positive outcomes from international expansion are limited.

4. The Strategic Management Process
Figure 1.1
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5. Opportunities and Outcomes of International Strategy
Figure 8.1

6. Identifying International Opportunities
International strategy
A strategy through which the firm sells its goods or services outside its domestic market
Reasons to having an international strategy
International markets yield potential new opportunities
New market expansion extends product life cycle
Needed resources can be secured
Greater potential product demand

7. Production is standardized and relocated to low cost countries.
Classic Rationale for International Diversification: Extend Product’s Life Cycle
Product Demand
Develops and Firm
Exports Products
Foreign
Competition
Begins Production
Firm Introduces
Innovation in
Domestic Market
Firm Begins
Production Abroad
Production is standardized and relocated to low cost countries.

8. International Strategy Benefits
Increase market share
Domestic market may lack the size to support efficient scale manufacturing facilities
Return on investment
Large investment projects may require global markets to justify the capital outlays
Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

9. International Strategy Benefits (cont’d)
Economies of scale or learning
Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D or distribution
Can spread costs over a larger sales base
Can increase profit per unit

10. International Strategy Benefits (cont’d)
Competitive advantage through location
Low cost markets aid in developing competitive advantage by providing access to:
Raw materials
Lower cost labor
Key customers
Energy

11. Determinants of National Advantage
SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.
Figure 8.2

12. Determinants of National Advantage
Factors of production: the inputs necessary to compete in any industry
Labor Land Natural resources
Capital Infrastructure
Basic factors include natural and labor resources
Advanced factors include digital communication systems and an educated workforce

13. Determinants of National Advantage (cont’d)
Demand conditions: characterized by the nature and size of buyers’ needs in the home market for the industry’s goods or services
Size of the market segment can lead to scale-efficient facilities
Efficiency can lead to domination of the industry in other countries
Specialized demand may create opportunities beyond national boundaries

14. Determinants of National Advantage (cont’d)
Related and supporting industries: supporting services, facilities, suppliers and so on
Support in design
Support in distribution
Related industries as suppliers and buyers

15. Determinants of National Advantage (cont’d)
Firm strategy, structure and rivalry: the pattern of strategy, structure, and rivalry among firms
Common technical training
Methodological product and process improvement
Cooperative and competitive systems

16. Selecting an International Corporate-Level Strategy
The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies
Some strategies provide individual country units with the flexibility to choose their own strategies
Others dictate business-level strategies from the home office and coordinate resource sharing across units

17. International Corporate-Level Strategy
Focuses on the scope of operations:
Product diversification
Geographic diversification
Required when the firm operates in:
Multiple industries, and
Multiple countries or regions
Headquarters unit guides the strategy
But business or country-level managers can have substantial strategic input

18. International Corporate-Level Strategies
Figure 8.3

19. Multidomestic Strategy
Strategy and operating decisions are decentralized to strategic business units (SBU) in each country
Products and services are tailored to local markets
Business units in one country are independent of each other
Assumes markets differ by country or regions
Focus on competition in each market
Prominent strategy among European firms due to broad variety of cultures and markets in Europe

20. Global Strategy Products are standardized across national markets
Decisions regarding business-level strategies are centralized in the home office
Strategic business units (SBU) are assumed to be interdependent
Emphasizes economies of scale
Often lacks responsiveness to local markets
Requires resource sharing and coordination across borders (hard to manage)

21. Transnational Strategy
Seeks to achieve both global efficiency and local responsiveness
Difficult to achieve because of simultaneous requirements:
Strong central control and coordination to achieve efficiency
Decentralization to achieve local market responsiveness
Must pursue organizational learning to achieve competitive advantage

22. Environmental Trends Liability of foreignness
Legitimate concerns about the relative attractiveness of global strategies
Global strategies not as prevalent as once thought
Difficulty in implementing global strategies
Regionalization
Focusing on particular region(s) rather than on global markets
Better understanding of the cultures, legal and social norms

23. Choice of International Entry Mode
Type of Entry
Characteristics
Exporting
High cost, low control
Licensing
Low cost, low risk, little control, low returns
Strategic alliances
Shared costs, shared resources, shared risks, problems of integration
Acquisition
Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations
New wholly owned subsidiary
Complex, often costly, time consuming, high risk, maximum control, potential above-average returns
Table 8.1

24. Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm has no foreign manufacturing expertise and requires investment only in distribution.
Export

25. Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm needs to facilitate the product improvements necessary to enter foreign markets.
Licensing

26. Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm needs to connect with an experienced partner already in the targeted market.
Strategic Alliance

27. Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm needs to reduce its risk through the sharing of costs.
Strategic Alliance

28. Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm is facing uncertain situations such as an emerging economy in its targeted market.
Strategic Alliance

29. Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.
Wholly-owned Subsidiary

30. International Diversification and Returns
Expanding sales of goods or services across global regions and countries and into different geographic locations or markets:
May increase a firm’s returns (such firms usually achieve the most positive stock returns)
May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns

31. International Diversification and Innovation
Expansion sales of goods or services across global regions and countries and into different geographic locations or markets:
May yield potentially greater returns on innovations (a larger market)
Can generate additional resources for investment in innovation
Provides exposure to new products and processes in international markets; generates additional knowledge leading to innovations

32. Complexity of Managing Multinational Firms
Expansion into global operations in different geographic locations or markets:
Makes implementing international strategy increasingly complex
Can produce greater uncertainty and risk
May result in the firm becoming unmanageable
May cause the cost of managing the firm to exceed the benefits of expansion
Exposes the firm to possible instability of some national governments

33. Risk in the International Environment
Political Risks
Economic Risks
Political risks include:
Instability in national governments
War, both civil and international
Potential nationalization of a firm’s resources

34. Risk in the International Environment
Political Risks
Economic Risks
Economic risks are interdependent with political risks and include:
Differences and fluctuations in the value of different currencies
Differences in prevailing wage rates
Difficulties in enforcing property rights
Unemployment

35. Risk in the International Environment
Figure 8.4a

36. Risk in the International Environment (cont’d)
Figure 8.4b

37. Limits to International Expansion
Management Problems
Cost of coordination across diverse geographical business units
Institutional and cultural barriers
Understanding strategic intent of competitors
The overall complexity of competition